Side-by-Side Safe Harbor

[00:00:00] Speaker A: Foreign. Welcome to our podcast series A and M Tax Tax Policy Updates where we bring you insights into the latest developments in global tax policy and controversy matters. Today we are here to discuss the recent package from the OECD on Pillar 2, specifically covering the side by side safe harbor. I am Brian Glansberg, a Managing director with Alvarez and Marcel in the global corporate transaction tax and advisory practice based out of New York. I've spent over two decades advising multinational companies on international tax policy, cross border restructuring, M and A and sell side work, as well as the practical implementation of global tax reform initiatives including pillar 2. I'm joined today by Corey Terry, a Managing Director who recently joined Alvarez and Marcel's CTTA practice who is also based in New York. [00:01:05] Speaker B: Hello. Yes, very happy to be here. As Brian mentioned, I recently joined the AMCTA practice in New York and I came over from IBM where I led the international tax and M and A tax teams. I've spent about 20 years working on Cross border M and A international Tax. Spent a lot of time on Pillar two and I'm very excited to be discussing this. My favorite topic, which is the pillar 2 side by side safe harbor. [00:01:36] Speaker A: Great. Thanks Corey. Thanks for joining us today. So today's podcast we're going to focus on one of the more consequential elements of the January 2026 package and that is the side by side safe harbor. But before we jump into much detail on that, we thought it made sense just to give a brief history lesson here to reground ourselves in kind of how we got here and what were the issues that kind of gave rise to us landing with the package that we were presented with in January. Corey, you want to take us a little bit down memory lane here? [00:02:14] Speaker B: Yeah, absolutely. So I don't want to go too far back, but I think the seeds of what we're looking at today really started back in the first Trump administration. As you may recall, the initial Pillar 2 blueprint was released October 2020 and it really included two key elements that are relevant to today's discussion. First, it had the undertaxed payment rule, which is not to be confused with the ultimately adopted Under Tax Profit rule. And second, it left open the question about whether the US GILTI system was going to be a qualifying IRR or not. Now, the GILTI system is a blended regime and the qualifying IRRs generally require that you have the computation be done on a separate country basis. [00:03:02] Speaker A: Yeah, that's great points, Corey. I think the key point there on UTPR was that it started as an undertax payments rule, which I always thought of similar to how some of the ATAD rules in the EU were implemented, where they looked to disallow deductions for certain payments and not where it ultimately morphed into, which is what it is today, the undertax profits rule that it became. [00:03:30] Speaker B: Absolutely. And it was obviously a pretty big shift. So how do we get to that shift? Well, back then in the first Trump administration, it was well reported that the US Was very concerned about how the Pillar two rules worked, how they could impose on US Sovereignty. And really the US Was gonna be non committal as participating in the project, absent some major concessions which would include potentially treating guilty as a qualifying IRR. Now the U.S. s posture changed towards pillar two during the Biden administration and ultimately the U.S. was one of 136 countries that signed onto the full inclusion framework back in October of 2021. Now importantly, that final framework included the new Under Tax Profits rule and it effectively excluded Gilti from ever being a qualified irr. Now importantly, this put the US Multinationals squarely in the crosshairs of Pillar two, both on their US Profits, which could be taxed under the new UTPR rules and under the IRR rules. And that's despite the fact that the Gilti regime was already taxing earnings of foreign subsidiaries of U.S. multinationals. [00:04:48] Speaker A: Yeah. And I know the other big issue that was out there, Corey. Right. Was the to the extent you had permanent items like the US R&D credit that would bring your US globe ETR below 15%, that now opened up the door to any country in the world that had adopted utpr now taxing those earnings. And that certainly was a big issue from a US Perspective. [00:05:13] Speaker B: Yeah, absolutely. So there was some relief that was provided. In July 2023, the 20% UTPR Safe harbor came in which effectively said that for us MNCs, you are going to be out of the UTPR on your US earnings. However, it didn't have any effect on IRRs for lower tier subs. And the 20% UTPR safe harbor expired at the end of 2025. Now flash forward to beginning of 2025, the new second Trump administration. On day one, an executive order was issued that effectively disavowed any pillar 2 agreement that the US entered into under prior administrations. And it explicitly said that the Pillar 2 rules will have no force in the United States. Now coming off of that, Congress moved quickly and among other things, the so called revenge tax section 899 was quickly drafted or repurposed from prior drafts and that proposal and that provision would effectively assess up to a 20% additional tax on residents of countries that impose extraterritorial and discriminatory taxes like the ucpr. Now the House actually passed an even more aggressive version of 899 in May of 2025 and it seemed like things were coming to a head. But behind the scenes the US was negotiating with the OECD and the G7 countries. And in June of 2025 a agreement was reached among the G7 countries that would effectively provide the framework for the side by side safe harbor that we saw enacted this January in 2026. Now in response to that, Congress and the senate removed section 899 from the OB3 provisions and OB3 was enacted without the revenge tax. However, Congress was quick to say that those provisions could be quickly re enacted or re proposed and enacted should the pillar 2 side by side safe harbor not come together. And of course on January 5, 2026 we did see the safe by side by side safe harbor administrative guidance issued. And that brings us to today's discussion. [00:07:45] Speaker A: Great, thanks. Thanks Corey. Always great to go down memory lane here and reset ourselves as to how we landed where we are. So let's go quickly through what it means to be an eligible side by side regime to cut to the chase as we sit here today In February of 2026, the US tax regime or the US system is an eligible side by side regime. I don't want to spend too much time going through specifically what that means in terms of the requirements for the overall tax system to qualify, but there are a few key elements that are important just to touch on because we'll highlight some of the issues that need to be considered in the future. So the first criteria is that the regime has to have an eligible quote domestic tax system and a quote eligible worldwide tax system provide a foreign tax credit for cutie mtts, and it has to the ineligible domestic task system and worldwide tax system that was enacted prior to January 1, 2026. So clearly a lot of defined terms here that folks I'm sure have read through in the package. But let's highlight specifically what some of these terms mean. And let's start with the Domestic Eligible Domestic Tax system which is a 20% statutory corporate income tax rate, a system that has a QDMTT or a corporate alternative minimum tax, a CAM T that is based on financial statement income at a nominal rate of at least 15% and no material risk that in scope M and E groups will be subject to an ETR below 15%. Now when this package first came out, I'm sure you know you and I were not the only ones that quickly scrolled through the document or tried to do a control fine for United States to confirm that the US was an eligible side by side regime. But that specifically was not included in the document and instead it is listed on the central record of the OECD website which states that the US is in fact a qualified side by side regiment which is the key aspect of this system for US parented groups. Now not all hope is lost for other jurisdictions. The inclusive framework will assess other jurisdictions pre existing tax regimes for eligibility by mid-2026 and begin initiating those requests in 2027 or 2028. So more to come in terms of other tax systems globally that will qualify for this new regime. The important thing here is to just focus on what does this mean, right? So as a US multinational company, what happens if I have an eligible side by side regime and I elect into this system? Well the punchline here is the IIR and the UTPR were will be deemed to be zero for all jurisdictions. What it does not do is turn off the qualified domestic minimum tax regime for any countries that have enacted that tax system. So if qdmtts have been enacted in a country in which you have presence, you cannot ignore pillar two. As a US tax professional, it is still very much relevant to your world IIR and UTPR slightly less so. And we'll talk a bit where it may be relevant but for you know, kind of ordinary course review, IIR and UTPR is turned off once you elect into this regime as part of the filing of your globe information return. Right. [00:11:51] Speaker B: And importantly on the GIR front, you know there was some discussion about whether or not this safe harbor would include an exception for filing the gir and I think a lot of people expected that it would. That did not come to be although you do get some simplified reporting in certain situations. So importantly now us MNCs will still need to comply with the GIR rules, pick a jurisdiction to file it in, suffer the administrative burden of doing that, but also the information sharing side of it which needs to be considered, this information is going to be sent out of the country and filed in another jurisdiction. So that part of this arrangement is less than ideal. [00:12:38] Speaker A: Great point Corey. The last point just on the background of the system here is that there will be future reviews of the of the countries that become eligible or are published as having qualified side by side regimes. So they refer to this as the stock take to identify any integrity risks in these systems. Clearly, as we've all come to know and love, international tax regimes are by no means static. And so, you know, for the us, specifically, as we think about things like CAMT and the implications to, to that system and how that has evolved since it's been enacted, even as, as you know, closest yesterday, where we had a recent, some recent guidance put out around treatment of R and D deductions in the US and some of the implications to the cmt, you know, begs the question in the future, what is that going to mean in terms of the US's eligibility for the side by side regime? So, you know, a lot of US tax policy developments is going to be wrapped up in this conversation going forward. It's not something that we just kind of walk away from and assume it's not going to be relevant, at least for now. Corey, why don't we spend a couple minutes here just quickly talking about some more specifics for US multinationals. You know, we kind of hit the point again that QDMT's are still relevant. But why don't you take us through a couple of other key points here? [00:14:10] Speaker B: Yeah, I think you hit on the big ones. I think the sound bite for US multinationals is that if the US is taxing your income, either your US income through normal corporate income tax rules, your non US earnings through GILTI through ECI mechanisms, that income should not be taxed under a UTPR or an IRR regime, full stop. Now as Brian mentioned, QDMTTS will still come first and that's really reflective of the US's position on this system. From the beginning, the US asked that US tax sovereignty be respected, but the US also acknowledged that that means that other countries tax sovereignty needs to be respected. So QDMTTS will still come first and this is still an issue that US multinationals need to consider. Now given this new certainty though, with the side by side safe harbor, this is a great time to reevaluate your structure to see what countries am I operating in, what are my flows, where am I holding my companies, and is this the best way to be operating given this new world in a side by side safe harbor regime. [00:15:30] Speaker A: A great, great point, Corey. The, the other thing that we'll just call out for US tax professionals that are working with or for US multinationals is from a due diligence standpoint, as you're looking at target companies, to the extent that those targets are foreign parented, the side by side regime as of today does not apply for them. Right. So the IIR and UTPR are still very much relevant from a diligence perspective. So something to keep out and keep in mind as you're looking at transactions. The other point too, which we didn't touch on before, but I think is also important from a tax provision perspective, is that these rules as of today have not yet been enacted into local country laws. So the administrative guidance has been released and the expectation is that certain countries, to the extent possible, will enact them with Retroactive Effect 2, 1:1, 2026. But we do need to have local country legislation processed and approved in order to fully take this administrative guidance into effect. And so I think the key message there is just to make sure, if you have not started those discussions already, that you are having conversations with your, your auditors to confirm what sort of disclosure, if any, needs to be made in your financial statements as you wait for some of the local countries to go ahead and enact these rules into local law. [00:17:07] Speaker B: Yeah, it's a great point. And just to add on to that, you could think of a situation where one country keeps a UTPR on their books for several years and doesn't make the change. Does that mean that they can go and collect all of the UTPR because they haven't adopted the safe harbor? It seems kind of crazy, but potentially that's something you'd have to think about. [00:17:32] Speaker A: So turning to non US multinationals quickly, I think the key message here is really for 2026, not much has changed. So for 2425, to the extent IIR was relevant to you or UCPR was relevant to you, for now it's business as usual. And so that does create a divide here between US parented groups and foreign parented groups with respect to their pillar 2 tax burden potentially obviously all subject to individual facts and, and effective tax rate calculations. But for now we do see this divide between us and non us MNCs and so it's going to be interesting to see how quickly some of the local countries look to move to get their systems qualified within these rules. So just to summarize here, the important thing with this side by side safe harbor is there are still filing requirements. So for 2024 and 2025 the compliance side of the House really is unchanged. You still have your, your returns that are due in June of 26 and March of, of 2027 and then for 2026 you still have your QDMT filings, your CBCR or your simplified ETR safe harbor calculations that need to be done as well as the GIR with potentially some reduced filing requirements in light of electing into the side by side safe harbor. And unfortunately if you're not a US multinational, you do still have to think about, you know, filing those full returns where relevant. So really, really important to stay up to speed on the compliance aspects of this as things develop. On the as far as key takeaways, Corey, maybe I'll go first here and just hit on the two items that I've been reiterating to folks is if you're a US Company, you cannot ignore Pillar two. QDMT is still relevant. It is still having a big effect on companies not only from just a non US Tax perspective, but it's also having knock on implications to their US Foreign tax credit position. And so the modeling is super super important to make sure that you know, under the changes from OB3 you're forecasting out what is the QDMT do to your overall foreign foreign tax credit position. And then the other point that I'll hit on Corey is just the GIR filings that you're not fully out of complying here. There still are items that you need to complete even if you elect into the side by side regimen. [00:20:26] Speaker B: And maybe I'll just add that as Brian mentioned, certainly there are requirements to be in a qualifying tax system as the US Is right now. And so questions remain. Does that tie Congress's hands from repealing the Camp D or other changes that could effectively knock you out of qualifying for this safe harbor and then maybe just to leave you with, you know, traps for the unwary. These rules are complicated. There are nuanced, nuanced interactions between the local rules, the domestic rules, the US Tax rules. Brian mentioned, foreign tax credits. There's a lot coming together here. So it's just a great time to review, you know, your structure and make sure you have a handle on what is what these new rules mean to you. [00:21:19] Speaker A: Absolutely. Well, thanks everyone for joining us today. Please do stay with us as we continue this journey in our upcoming podcast. Please also check out our monthly newsletter which brings you the latest key updates and selected editorial pieces from our Global Tax Network. And don't forget to follow this channel. There will be regular insights and updates through podcasts coming your way, including additional Sessions on the Pillar 2 January 2026 guidance. Thanks everyone. Thanks Corey for joining today. [00:21:51] Speaker B: Yeah, thank you everyone.